USD/CAD Forecast: CAD demand drying up, but it's a HOT week ahead for the pair

This was the week: Markets kept with enthusiasm following last Friday's jobs data

The calendar was light and markets instead traded out of long dollar positions - Some of that flow searching for a home was attracted into a bullish trend in the Loonie following last week's encouraging labour market surprise.

The Canadian economy added 56k jobs in February last week. This was well above the market consensus for unchanged employment. Moreover, further gains in labour force participation only saw the unemployment rate hold at 5.8% and encouraged, wage growth for permanent employees firmed to 2.2% y/y.

The Loonie indeed received a shock of life, but its revival is dubious, and prospects remain troubled considering there is virtually no policy impulse in the trade for the currency and the jobs data, all in all, will do little to change convictions at the Bank of Canada where the broader slowdown is a more critical factor. The BoC was last warning that there was "increased uncertainty" on the timing of future hikes and was removing wording around the need for rates to rise to the neutral range over time. As such, USD/CAD is likely to trade between a range of 1.3100/1.4000 for the year, although the balance of risks implies that the pair will spend the majority of its time this year in a narrower 1.31-1.38 range.

As mentioned, besides Canadian homes data where home values dropped 0.6%, the first decline since 1990, there was little from the Canadian calendar. BoC's Wilkins spoke last on Thursday, albeit failing to impact the markets one way or another, and the majority was focused on US data:

1) US Retail Sales: January retail sales rose by 0.2% following December's 1.6% contraction and surpassed the market expectation of for a no-change.

2) US CPI: US CPI climbed 0.2% m/m in February. Core inflation, up 0.1% m/m, was below market expectations - (The benign inflation backdrop comes against a steeper Phillips curve and continues to illustrate an absence of transmission of higher wages into higher inflation).

3)  US PPI:  February’s PPI data undershot expectations with the headline rate easing to 1.9% y/y (from 2.0% last month) with the core measure at 2.3% y/y. Again, there is no evidence of a pick-up in inflation pressures. The Fed’s hope that the steepening in the Philips curve will translate into higher inflation remains elusive. 

Canadian events: Retail Sales and CPI

The upcoming week holds top tier Canadian data on the 22nd March with Feb CPI and Retail Sales. Stronger gasoline and food prices will likely help CPI firm to 1.5% y/y in February. However, headline inflation is expected to hold below 2% for most of 2019, so a modest uptick is unlikely to rally the bulls in for a sustained rally in the Loonie on such an outcome as it will do little to change the core narrative held at the BoC. However, retail sales could come in slightly more upbeat.

Then, on the 19th March, the Canadian Federal Budget will be released which is expected to focus on affordability for homeowners. However, there is little scope for additional fiscal stimulus, and revenue projections are likely to be revised lower. Refinancing needs will more than likely spike in FY 2019/20. 

Here were the latest Canadian events and next week's calendar: 

US events: Its all about the FOMC

Its that time again and this is where the markets will focus most - The FOMC rate decision. Markets will focus on the dots where no more than one more hike for this year is expected to be shown. There are none expected for 2020. Investors are looking for some deeper guidance on the balance sheet runoff. Powell's press conference will likely address that as well.

Here is the American calendar for the week: 

USD/CAD: Technical Analysis

USD/CAD remains better bid above the weekly Ichimoku Cloud and rallies in the loonie are a fade between late Dec highs and late Jan lows. USD/CAD is supported at the 38.2% Fibo of that range coming in a few pips below 1.33 the figure with the Tenjen sen catch any slippage below there ahead of the rising 21-D SMA located around S2 at 1.3281. However, a break there opens risk to test the bottom of the daily Ichimoku Cloud with a confluence of the 23.6% fibo support just ahead of 1.32 the figure. To the upside, the price is resisted at the top of the cloud and the 50% Fibo around 1.3370. A break there opens risk to 1.3450/60 swing high territory.

USD/CAD Sentiment

The Forex Forecast Poll is a sentiment tool that highlights near- and medium-term price expectations from leading market experts and it shows a bearish outlook on a forward basis.

"Sellers could push the US Dollar towards a support cluster formed by the combination of the 50-, 100- and 200- DAY SMAs at 1.3236."